Investor Tax Credits and Entrepreneurship: Evidence from U.S. States
Angel investor tax credits are used globally to spur high-growth entrepreneurship. Exploiting the staggered implementation of these tax credits in 31 U.S. states, we find that while they increase angel investment, they have no significant effect on entrepreneurial activity. Tax credits induce entry by inexperienced, local investors and are often used by insiders. A survey of 1,411 angel investors suggests that a “home run” investing approach alongside coordination and information frictions explain low take-up among experienced investors. The results contrast with evidence that direct subsidies to firms have large positive effects, raising concerns about using investor subsidies to promote entrepreneurship.
We thank Jim Albertus, Tania Babina, Laurent Bach (discussant), Greg Brown, Jesse Davis, Ryan Decker, Mike Ewens (discussant), Joan Farre-Mensa, Paolo Fulghieri, Andra Ghent, Juanita Gonzales-Uribe (discussant), Will Gornall, Apoorv Gupta, Arpit Gupta, Thomas Hellmann, Yael Hochberg, Yunzhi Hu, Jessica Jeffers (discussant), Simone Lenzu, Josh Lerner, Song Ma, David Matsa, Arnobio Morelix, Holger Mueller, Ramana Nanda, Daniel Paravisini (discussant), Andrea Passalacqua, David Robinson, Pian Shu, Morten Sorenson, Denis Sosyura, Chester Spatt, Luke Stein (discussant), Kairong Xiao, Linghang Zeng, Eric Zwick, and seminar participants at the 3rd Junior Entrepreneurial Finance and Innovation Workshop, 8th HEC Paris Workshop on Entrepreneurship, ASU Sonoran Winter Finance Conference, Carnegie Mellon University, Duke-UNC Innovation and Entrepreneurship Research Symposium, Finance in the Cloud II, Jackson Hole Finance Group Conference, Kenan Institute Frontiers of Entrepreneurship Conference, MFA, NYU Stern Corporate Governance Seminar, Southern California PE Conference, UCLA, UVA Darden, UNC Entrepreneurship Working Group, and WFA for helpful comments. We thank Will Gornall for data assistance, and Abhishek Bhardwaj, Grant Goehring, Michael Gropper, Sunwoo Hwang, Nick McMonigle, Danye Wang, and Jun Wong for excellent research assistance. We also thank Jeff Cornwall, Gwen Edwards, Jeff Sohl, Krista Tuomi and other state officials for providing helpful details about the angel market and angel investor tax credits. Howell’s research on this project was funded by the Kauffman Foundation and the Kenan Institute Frontiers of Entrepreneurship grant program. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Sabrina T. Howell
I conducted a survey of angel investors for this project, which was determined by the NYU IRB to be exempt from the federal policy, with a Federal assurance number FWA#00006386.